As part of an inheritance agreement, Jenna can choose between the takeover of 2 different contracts.

The first contract foresees following payments to Jenna:

1. One year from now: 12 000; the probability that this payment will be executed is 95%;
2. Two years from now: 14 000; the probability that this payment will be executed is 80%;
3. Three years from now: 20 000; the probability that this payment will be executed is 75%;
4. Four years from now: 24 000; the probability that this payment will be executed is 88%;
5. Five years from now: 50 000; the probability that this payment will be executed is 50%;

The second contract is a five year ordinary annuity agreement. The five yearly payments to Jenna (starting 1 year from now) all have a face value of 20 000. This contract is secured by a bank, so the payments are certain.

Use 10% interest rate to calculate the discounting and/or compounding.

Questions:

1. Calculate the expected PV of the 2 contracts. What is your advice to Jenna?
2. What is the worst and best case PV of the first contract?
3. What is the value of the yearly payment of the annuity for which the 2 contracts are equivalent?